Hitachi's nuclear plant business fending for itself
Hitachi Ltd., a Japanese conglomerate with annual sales of about ¥10 trillion, was once considered a giant of the industrial world, but now it appears to be a timid mouse. Disconcerted employees from Hitachi's Nuclear Energy Business Unit are lamenting the company's inability to come up with a long-term plan for survival.
"The future of producing boiling water reactors has a limit," one employee said. "If we don't quickly enter the market manufacturing pressurized water reactors, we won't be able to compete with major global rivals."
Since the March 2011 meltdowns at the Fukushima Daiichi Nuclear Power Plant, Japan's domestic nuclear power generation market has shrunk. A realignment of the nation's three main reactor makers has become an urgent priority. This consolidation will determine the survival (or otherwise) of Hitachi, which develops boiling water reactors; Mitsubishi Heavy Industries Ltd., which constructs pressurized water reactors; and Toshiba Corp., which deals with both types. Pressurized water reactors are the dominant reactor in the global nuclear energy market, so Hitachi has contented itself with being a minor player in the Far East. Hitachi presently has a golden opportunity to redress this situation, but has yet to act upon it.
In 2006, Toshiba purchased Westinghouse Electric Company LLC, a major U.S. builder of pressurized water reactors. However, in the aftermath of a massive accounting scandal in which profits were inflated for years, Toshiba tumbled into the red and narrowly avoided becoming insolvent. Forming a tie-up with struggling Toshiba at this point could have catapulted Hitachi into the global competition for pressurized water reactors. However, Hitachi was hesitant to commit to such a partnership. If the "giant" remained indecisive over whether to stick to its boiling water reactors or switch to pressurized water reactors, Hitachi would inevitably have been left behind in the reorganization of the nuclear power industry. But according to a senior official of the Economy, Trade and Industry Ministry, it was no surprise Hitachi got cold feet.
"That company doesn't show any enterprise," the official said. "In fact, about seven or eight years ago, it was seriously considering withdrawing from the nuclear energy business."
Hitachi boss not interested in pressurized water reactors
The diminished output of the No. 5 reactor at the Hamaoka Nuclear Power Plant in Shizuoka Prefecture and the No. 2 reactor at the Shika Nuclear Power Plant in Ishikawa Prefecture are vestiges of how Hitachi was pushed to the brink of quitting the nuclear energy business. Chubu Electric Power Co. operates the Hamaoka plant, while Hokuriku Electric Power Co. runs the Shika power station. Hitachi constructed both these advanced boiling water reactors, which had a rated output capacity of 1.35 million kilowatts. However, in 2006, inspections revealed that a design fault had caused many blades in the low-pressure steam turbine to crack, or even break. Both reactors had to be shut down for an extended period.
Hitachi repaired the faulty turbines at the two reactors at considerable expense, but the reactors never regained their full output capacity. Chubu Electric sought compensation of ¥41.8 billion, while Hokuriku Electric demanded ¥20.2 billion to cover losses arising from the shutdown. In the end, Hitachi agreed to pay Chubu Electric ¥9 billion and Hokuriku Electric ¥6 billion. At the time, Hitachi's core businesses—home appliances, information systems and heavy electrical machinery—were struggling across the board. In fiscal 2008, Hitachi logged a net loss of ¥790 billion, the largest ever by a domestic manufacturer.
"Clinging on to our money-losing nuclear energy business won't help drag the company off rock-bottom," a discouraged Hitachi official said. The idea of transferring this business to Toshiba, which was in excellent spirits following its acquisition of Westinghouse, was becoming a more realistic proposition.
Seven years on from that, the positions of Hitachi and Toshiba have, somewhat ironically, been switched. Toshiba has sold its medical device and home appliance units and is withdrawing from the domestic TV production business. Its cash flow is dwindling. Westinghouse's status as a growth driver for Toshiba was reinforced by its recent agreement to construct six reactors in India, but with a capital adequacy ratio of just 5.5 percent, Toshiba does not have the money to make new investments, including in its crucial NAND flash memory business.
Due to these circumstances, a plan was floated to sell off some of Toshiba's shares in Westinghouse, its prized possession. This would reduce Toshiba's stake from the current 87 percent to 51 percent. Selling off Toshiba's domestic boiling water reactor business also is under consideration. The bottom line is that Toshiba will discard its operations in the shrinking domestic nuclear energy industry, but by holding tightly to a 51 percent share in Westinghouse, it will seek a path for survival through the overseas market for pressurized water reactors.
That is a reasonable choice. All six reactors at the crippled Fukushima nuclear plant will be decommissioned. Of the other 23 boiling water reactors in Japan, at best only 15 will be restarted after they meet toughened regulatory standards introduced after the Fukushima accident. In a worst-case scenario, this number could fall to 10. Given this situation, there is no way Toshiba can retain its 2,000 nuclear engineers, nor Hitachi its 1,800 nuclear engineers. If Hitachi were to incorporate Toshiba's boiling water reactor business into its operations before they both collapse, and then make an investment in Westinghouse, it could become a major player.
However, a well-placed source at Hitachi shook his head at this suggestion. "Mr. Nakanishi is probably thinking mainly about Hitachi's advanced boiling water reactor business in England," the source said, referring to Hitachi Chairman Hiroaki Nakanishi. "His company won't enter the pressurized water reactor field."
MHI turned down offer to jointly run Westinghouse
It is common knowledge that Nakanishi was instrumental in Hitachi's sharp rebound that was crowned by a record net profit of ¥350 billion in fiscal 2011, just three years after its colossal loss. He shifted Hitachi's thermal power generation operations to Mitsubishi Hitachi Power Systems Ltd., a joint venture company formed by Hitachi and MHI in 2014, and oversaw Hitachi's purchase of Horizon Nuclear Power, a British nuclear power station developer. Nakanishi's superb ability to navigate this course of "selection and concentration" means that even though he was succeeded as chief executive officer by President Toshiaki Higashihara in April 2016, much of Hitachi's decision-making still revolves around him.
Horizon is involved in construction of four advanced boiling water reactors that could generate power by the mid-2020s. If things go well, it could construct six reactors. In that case, even if the Japanese market for Hitachi's nuclear power business decreases, it should be able to hold its ground for 10 or 20 years. There was even speculation Hitachi might shift the headquarters of its nuclear power operations to England, just like it has for its global rail business. Nakanishi is undoubtedly confident about his company's nuclear operations in Britain.
Amid all this, MHI has been harboring a feeling of hostility toward Toshiba. This animosity has its roots back in a failed business proposition made a decade ago. The grudge arose after then MHI Chairman Takashi Nishioka rejected Toshiba Chairman Tadashi Okamura's offer to transfer part of Toshiba's 77 percent stake in Westinghouse to MHI, and for both companies to jointly run the U.S. company. "No, thank you," was the curt reply from Nishioka.
When Westinghouse was being sold off by its English parent company British Nuclear Fuels Ltd., MHI was tipped to be the leading candidate to snap up the company, given its long cooperative relationship with its fellow pressurized water reactor manufacturer.
But, it was Toshiba that tendered a successful, if exorbitant, bid to buy Westinghouse, paying $5.4 billion—more than double the $2.5 billion offered by MHI. Nishioka immediately claimed Toshiba would "never be able to cover the cost." Toshiba, for its part, apparently realized it had paid over the odds for the American firm, prompting Okamura to request—cap in hand—that MHI buy a stake. The fiercely proud Nishioka instantly and flatly rejected the entreaty.
Immediately after the Toshiba-MHI negotiations fell apart, Toshiba started headhunting Mitsubishi engineers, stoking the latter's resentment toward the former—an antipathy that lingers even today. MHI's enmity extends toward the Ministry of Economy, Trade and Industry (METI), too, as behind-the-scenes support for Toshiba's acquisition of Westinghouse was provided by Tadao Yanase, director-general of METI's Economic and Industrial Policy Bureau, who, at the time, was chief of the Nuclear Energy Policy Planning Division at the Agency for Natural Resources and Energy.
Ten years later, METI is once again urging MHI to buy a stake—concretely, 36 percent—in Westinghouse, through an investment scheme provided by the Innovation Network Corporation of Japan (INCJ), a public-private fund administered by Yanase's bureau. But, MHI remains unswayed. Setting aside the question of pride, the burning issue now is the price at which Toshiba intends to sell Westinghouse shares.
After reviewing the value of its nuclear power business assets—most of which are associated with Westinghouse—Toshiba entered a ¥250 billion impairment loss in its settlement of accounts for fiscal 2015. As to the reason for the loss, Toshiba cited the rising cost of procuring funds from the market due to the declining rating of its bonds, rather than a ¥250 billion reduction in the projected future earnings of Westinghouse. The company also noted that although Westinghouse's intangible fixed assets (such as accumulated technologies) had increased, such assets were not entered in the financial statements. Instead, the company had to take an impairment loss from goodwill—the difference between the cost of acquiring Westinghouse, and the latter's assets.
After the impairment loss, Westinghouse's asset value—goodwill and intangible fixed assets—now stands at ¥243 billion. Based on this, a 36 percent stake in the firm would cost around ¥100 billion. MHI is unlikely to bite at this price, however, given the fact it tendered a bid of $2.5 billion (about ¥258 billion) for the whole company a decade ago, at a time when there were calls for a "nuclear renaissance" to help combat climate change. Indeed, MHI would likely even balk at an ¥80 billion price tag.
Hitachi left out in cold in nuclear energy reorganization
MHI, a major manufacturer of pressurized water reactors parallel to Westinghouse, is weighed down by Areva SA, France's ailing nuclear giant. To counter Westinghouse's mainstay AP1000 plant, MHI and Areva jointly developed the ATMEA 1 reactor model. As a result of sales pitches by Japanese and French leaders, Turkey bought four such reactors. MHI is now being asked to take an around ¥100 billion stake in Areva—a request the Japanese maker is unable to refuse.
Even without Areva, MHI is presently facing project-specific deficits due to delays in the delivery of large passenger ships and the development of its MRJ passenger jet. In light of such circumstances, it is difficult for MHI to furnish Areva with capital. Officials connected to the Prime Minister's Office are therefore now proposing that MHI's projected burdens be reduced via a body provisionally titled "spent fuel reprocessing organization," to be set up by METI this fall.
Nuclear reprocessing has been conducted at Japan Nuclear Fuel Ltd.'s Rokkasho Reprocessing Plant, using money from a ¥2.4 trillion fund set aside from utility charges. But following inauguration, METI's new organization will control reprocessing-related funds and supervise the plant's operational plans. The change will open the door for Japan Nuclear Fuel to raise funds, backed by a state guarantee, and make investments that support Japan's national policies.
As the Rokkasho facility was constructed using Areva's technology, it is not illogical for Japan Nuclear Fuel to provide capital to Areva, rather than MHI, to facilitate cooperation between Japan and France at the back end of the nuclear fuel cycle. It also means MHI would be spared shouldering the burden of supporting national policies if it agrees to provide capital to Westinghouse as part of the realignment of the nuclear industry. It remains to be seen, however, whether MHI can let bygones be bygones in terms of its relationship with METI.
If MHI can rekindle a partnership with Westinghouse through purchasing a stake in the firm, their joint development and production of pressurized water reactors will doubtless be robust. Toshiba, for its part, will play an engineering role in overseas markets. Hitachi, it seems, may be left out in the cold following a possible Toshiba-Westinghouse-MHI coalition.
Lack of Hitachi management leadership after V-shaped recovery
As previously mentioned, though Hitachi put Horizon under its umbrella as a wholly-owned subsidiary at a cost of £670 million (¥85 billion), it has no intention of engaging in the power generation business itself. Hitachi hopes to find investors and a utility operator for the business by the end of 2019, reducing its stake in Horizon to below 50 percent. However, the United Kingdom's impending departure from the European Union has become a massive concern for the company.
Hitachi will have to bear higher costs to export power plant facilities and equipment from Japan to the U.K. in the face of a strong yen and weak sterling, in addition to dealing with rising labor costs due to a drop in the number of immigrants entering Britain. Ultimately, the sovereign state's isolation will inevitably discourage investment from energy-related entities in Europe.
Indeed, there are already signs of reticence vis-à-vis investments in Britain. EDF (Electricite de France SA), a French public corporation, has deferred an investment decision on the Hinkley Point C nuclear facility in the U.K., partly because of its struggling subsidiary, Areva. Concerns have heightened that EDF may bow out from the project should relations between the British and the French badly sour following the so-called Brexit vote. If this comes to pass, the attitude of investors toward Horizon will likely change considerably. To make matters worse, there are no overseas operators using the type of advanced boiling water reactors that will be used by Horizon. There are only four such reactors in Japan.
It is hard to imagine Tokyo Electric Power Co., the operator of the disaster-struck Fukushima Daiichi Nuclear Power Plant, serving as an operator. Chubu Electric Power Co., which has started procedures to decommission two reactors at the Hamaoka nuclear power plant, is reportedly reluctant to take on such a role, while the Japan Atomic Power Co. does not have the necessary funding. Although Hitachi claims the construction of six advanced boiling water reactors for Horizon would be a ¥6 trillion project, questions remains as to whether it will be able to source the funding to operate them.
Hitachi, meanwhile, has struggled to find buyers for advanced boiling water reactors: Following the Horizon deal, Hitachi received only single order for a reactor—from Lithuania. Meanwhile, India has allocated construction of 12 reactors to the United States. It is believed that General Electric Co. (GE)—Hitachi's partner in the nuclear power business—and Westinghouse will each receive an order for six reactors. GE, however, is reportedly hesitant to accept the order, as India has no compensation system for nuclear accidents and requires reactor manufacturers to deal with such payouts. It is thus possible that Westinghouse will construct all 12 reactors.
"From a long-term perspective, it's essential for a reactor maker to start producing pressurized water reactors," a utility company executive said. "Hitachi should have pushed integration with MHI in the nuclear power business following the merger of their thermal businesses."
Hitachi, however, has been at the loggerheads with MHI over a loss-making thermal power project in South Africa, for which the former won a contract. Mitsubishi Hitachi Power Systems, their joint venture company, took over the project, but the two companies still bicker over who should bear the ¥380 billion loss incurred at the plant. Such a situation makes it difficult to pave the way for talks on a nuclear power business merger.
In short, there is an absence of management leadership at Hitachi, which has become complacent and dependent on Nakanishi—a charismatic leader who masterfully helped nurse the firm back to health.
The business of nuclear power is no different from other commercial enterprises. To wit: Timorously peering from a metaphorical business mouse-hole is not the behavior of a corporate entity that aims to be No. 1.
This is a translation of an article from the July 2016 issue of Sentaku. The original article can be found here.